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Midstream sector's ESG push under spotlight for Q2 earnings

Investors will be watching second-quarter midstream earnings for signs that accelerating commercial activity is sufficient to support new infrastructure growth opportunities.

Many pipeline companies in the midstream sector have been focusing on projects and initiatives designed to quantify, reduce or capture carbon emissions along the gas value chain, but the market is looking to see whether developers can make additional revenue from these efforts while keeping costs down.

"After last week's energy equity sell-off, investors are broadly questioning whether the earlier rally within energy has run its course and whether there is upside from here," Goldman Sachs said in a July 19 note to clients.

One of the themes unit holders are focused on, the investment bank continued, is "what is the best way to position for the ongoing energy transition/focus on ESG [clean technology]."

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According to analyst consensus, the 11 major North American pipeline companies analyzed by S&P Global Market Intelligence should mostly record year-over-year increases in adjusted EBITDA and revenues, but will see quarter-over-quarter losses after an unexpected windfall from February's winter storm benefited several operators during the first quarter. Still, management teams will likely face questions about investing additional capital in decarbonization.

Kinder Morgan Inc., which kicks off the reporting season on July 21, recently highlighted this potential trend when it announced plans to buy renewable natural gas developer Kinetrex Energy.

For CBRE Clarion Securities portfolio manager Hinds Howard, the deal is likely the first of several that midstream companies will ultimately pursue to participate in the energy transition and "reduce terminal value concerns" investors have about oil and gas assets.

"I would expect ongoing announcements like this related to RNG and carbon capture among large midstream companies because of their competitive advantage in those areas versus just trying to jump into wind farms or solar fields without a linkage to their existing footprints," Howard said in a recent interview.

The Equitrans Midstream Corp.-led Mountain Valley Pipeline LLC's decision to acquire carbon offsets for 90% of greenhouse gas emissions associated with operating the natural gas pipeline project over a 10-year period, on the other hand, may be less popular among pipeline operators.

"Not all members of the natural gas industry appear inclined to pursue such voluntary action and may not welcome MVP's move as it could be viewed as potentially setting a higher bar to future project approvals," ClearView Energy Partners told clients July 13. "We have been expecting project sponsors to begin seriously considering and likely proposing voluntary mitigation."

Consolidation will also be front and center, particularly after Plains All American Pipeline LP formed a joint venture with Stonepeak Infrastructure Partners portfolio company Oryx Midstream Holdings LLC. The venture, which will be known as Plains Oryx Permian Basin LLC, will include all of Oryx's Permian assets and a majority of Plains' assets within the basin, excluding the partnership's long-haul pipeline systems and selected intra-basin terminal assets. The pipeline partnership will serve as the operator and own 65% of the joint venture, while Oryx will hold the remaining 35%. The companies said they have agreed to a 10-year tiered, modified distribution sharing arrangement.

"While not a blockbuster or transformative transaction, we believe the JV formation fits with midstream investor desires," Mizuho Securities USA LLC told clients July 13. "The cashless deal affords PAA access to increased scale and cost optimization opportunities in a balance sheet neutral manner."

For LNG, long-term contracting efforts remain in focus as some developers compete to gain footholds in the carbon-neutral cargo market.

Cheniere Energy Inc., the largest U.S. gas exporter, appears to be "well-positioned to benefit from both gas price volatility and the cash flows from its long-term contracts on 80%+ of its capacity," Goldman Sachs said. "We believe catalysts remain ahead including the potential for significant deleveraging and meaningful capital returns to shareholders in the next 2-3 years."

Cheniere launched a series of climate initiatives on the eve of the company bringing its ninth liquefaction train online, embracing its role as a bridge to international markets that have aggressive climate policies.